Governments around the world may be starting to wonder if taking on the liabilities of the bust financial system was really such a good idea.
The markets took a real hammering yesterday as even the brightest star in the banking firmament – HSBC – turned out to have big problems, requiring the biggest non-government-backed rights issue in British history.
But that was nothing compared to the ultimate financial black hole. AIG, the world’s biggest insurer, has sucked in another $30bn from the US government, on top of the $150bn it’s already gobbled up.
On the downside, there’s plenty more bad news on the way. But on the upside, the carnage has left some nice safe blue-chip stocks looking very attractive indeed…
The bad news in the stock markets is set to continue
The FTSE 100 hit a six-year low yesterday. Doesn’t sound too bad, but if you ignore the post-tech bubble bottom of 3,287 back in March 2003, you’re actually looking at an index which is at its lowest levels since the mid-1990s.
The big news in London was HSBC’s weak results. The £12.5bn rights issue and even the dividend cut had been pretty well trailed over the weekend. But the share price still fell by nearly 19%.
Investors have been pinning their hopes on the notion that HSBC’s global exposure would make it a safe haven in the banking sector. But of course, this crisis is global. There is no safe haven. There’s no hiding place, certainly not when you’re a company this big.
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Meanwhile, the Dow Jones index slumped to well below 7,000. At 6,763, it’s now at its lowest level since April 1997. In the US, it was another big financial that dragged the index down, this time giant insurer AIG. The group unveiled a $62bn loss – for its fourth quarter alone. That’s the biggest quarterly loss in corporate history. It’s also the fifth quarter of losses in a row, during which time AIG has managed to lose more than $100bn. The US government is now trying to break up the company into smaller, more manageable chunks.
Is this the bottom? I suspect not. As one US fund manager told The Times, “We know there’s more to come – we just don’t know where from, and that’s very demoralising.” AIG for one, is likely to soak up more cash, and as the ‘real’ economy continues to worsen, more and more holes will appear in even apparently solid balance sheets. For an idea of how far markets could fall, see my colleague Dominic Frisby’s most recent Money Morning: How far will stock markets fall?
Now’s a good time to buy high-yielding blue chips
So I wouldn’t be buying into any index trackers right now. But that said, a falling market drags down all stocks – not just the ones that deserve it. That’s left some of the more defensive stocks that we’re generally keen on looking very attractive right now.
So this could be a good chance to top up on some decent, high-yielding blue chip stocks if you haven’t already. Among the oil majors, BP (LSE:BP) is yielding more than 7.5% just now, while Royal Dutch Shell (LSE:RDSA) is on more than 6%. And big pharma looks attractive too. GlaxoSmithKline (LSE:GSK) is yielding around 5.4%, while AstraZeneca (LSE:AZN) is yielding around 5.7%.
Sure, the stocks could fall further with the rest of the market. And there is the danger that if the oil price falls a lot further, BP and Shell could be forced to take another look at their dividend payments. But one thing we can be sure about is that these companies aren’t about to go bust or be taken over by the government – which arguably is the main thing to be worried about right now.
These stocks will also give you exposure to the dollar. That carries its own risks of course, but right now exposure to the dollar on balance, looks like a good thing to have. Sterling doesn’t look likely to make a comeback any time soon, while fears over a meltdown in Eastern Europe are driving the euro on to the ropes, and concerns over Japan’s economy mean the yen may have gone as far as it can for the time being.
For more on high-yielding stocks, you should take a look at Stephen Bland’s Dividend Letter email. Stephen tries to ignore the broader market and focus solely on picking stocks that will produce a decent long-term income. Find out more about the Dividend Letter here.
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